You may be thinking “New investors? But I want tips for trading stocks like the pros!” And I get that. But the thing is, when beginners first start trading stocks, it’s best to play in the wading pool — and stay away from the sharks. And there are plenty of sharks in the stock market!
That said, if you are willing to be patient and only use money that you won’t need for a long time — and can afford to lose if things go south — then you too can start to play in the market. Gamble is probably more accurate than play, but let’s see if we can at least help you improve the odds of winning.
Stock prices can go up and they can go down.
And you can lose everything.
So be aware of the risk before you trade.
Rules for trading stocks for beginners
NOTE: This is a basic beginner’s guide for trading stocks, with the hope of making money on a least most of your trades. This is NOT the same as rules for investing. For some investing basics click here:
Now for those rules …
1. Start small (win big — eventually)
We’re often told to think big when it comes to following our dreams, since even if you fall short it’s still pretty good. But when it comes to tips for trading stocks, the market has many built-in dream-stoppers. And it is oh so tempting to get caught up in the “I want more” — like a kid at a candy store window.
But I think it’s smart to invest small to begin with. Use a well-established online brokerage company with a low fee. And be careful to research exactly what each trade will cost you, so that you can subtract that (on the buy side and sell side) from any potential profits.
For example, let’s say a stock costs $5 to buy one share. And, if lucky, I can sell it later that day for $5.40. A tiny increase for sure. But 500 shares nets me $200 – minus my $4.95 fee (fees vary) on both ends of the trade. Not bad for a little extra spending money in one day.
2. Don’t be greedy (no regrets)
I was taught many years ago: don’t try to sell at the highest or buy at the lowest. You just need to make some money … and be happy doing that as often as possible. Even small amounts add up. So if your stock keeps climbing after you sold and made money, let go of any regrets. Move on!
But also, you can’t win them all. Sometimes we’ll take our best shot and we won’t come out a winner. Or, you find a favorite stock for trading, but it begins going up and up instead of letting you come back in again when it dips. That’s ok. Find another one.
EXAMPLE: Let’s say you sell one of your fave trading stocks when the price hits $25, taking a profit. And then you wait for a market and / or stock price dip to buy back in. But alas, it keeps going up. Let it go. No regrets. That’s why you need more than one trading stock to play with.
3. To win you sometimes have to lose
The stock market is gambling. Never forget that.
Or, more precisely, sometimes you have to be willing to take a loss and move on. You need to be practical. You’ve set aside a certain amount of money (I recommend you do not go beyond that), and if it sits in a stock doing nothing or going south, that is money you can’t use to make money.
So sometimes you have to cut your losses. Some people come up with a price that, if the stock dips below that number, they sell and move on. Or, if it will mean a loss to sell a stock that is just drifting around the same price you bought it, you can chose to sell that too. And then move on to a stock that has more trading action potential.
I’m not suggesting you make a practice of this. I’ve watched my stock go down well below where I expected and still kept it. But I knew that it was a stock I could live with for the long term, and was wiling to give it more time to make me money.
I can’t tell you when to take a loss or how often, but just know that many professionals take losses. And the good news is, losses can be used as deductions against investment profits when you do your taxes. So good to at least keep in mind if needed.
4. Be patient
While you don’t want to tie up your trading money in the same stock for many weeks at a time, sometimes you just have to wait and be patient. The other day I had an order in to sell my stock at a certain price, and the stock just kept missing. But two days later I got my price and moved on.
Then again, today my stock kept hitting close to the price I wanted, but just missing. And while I could have waited (emphasizing I often do), I quickly calculated the profit difference and decided to sell anyway. This way I freed up the money for something else I wanted to do that day.
Still, most of the time, when trading stocks, patience is your best ally. If you’ve done your research and have a stock whose range you are trading safely within, it’s worth hanging in for the trade. Sometimes it will take longer than you’d wish, but stocks have their own rhythm and action. And their own psychology.
5. Use trading tools like limit orders
If you buy or sell at the current market price whatever it is, you can wind up paying a lot more — and as a result making a lot less. So I suggest you use limit orders. These let you build in specific prices at which you will buy or sell the stock.
For example, let’s say you want to buy a stock that has been trading in the $8.00 to $9.20 price range. You might put in a “limit order” to buy 300 shares at $8.20 (giving yourself some flexibility).
After you get the stock (assuming you do), you can then put in a sell limit order for that same 300 shares at $8.98. And then you wait for that to “execute” (trade). That nets you a little over $220, after commissions if you use a discount broker. Maybe not a fortune, but small wins add up.
6. Don’t put all your trades in one stock basket
While you may wind up focusing on one or two stocks, you should make sure you find at least 3 or 4 stocks you feel good about for trading. This way if one of the stocks isn’t performing well, you can switch over to a better trader.
Stocks can get hot and then cool down. So it’s good to have extra stocks you can count on. And it’s also smart to continue looking to add to your stable of potential trading stocks. This way not only do you have alternatives, but you won’t feel the same pressure as if you relied on just one or two stocks.
Trading strategies — beyond the basic rules
Along with the above-mentioned rules for trading stocks, I’d like to offer you some basic trading strategies. You can develop your own over time, but these should give you a good head start.
- Do your research to find low-priced stocks. This is key. While you don’t want to trade penny stocks that can go bust, lower-priced stocks (under $20) allow you to buy in larger numbers. And, if you do the math, that means that you can make money on smaller price movements.
- Make sure you pick stocks with enough trading volume. (You can find trading volume for individual stocks online.) If only a few hundred shares of the stock trade each day, odds are that it won’t be a great trader for you.
- You want to find solid companies you would feel good about owning if you wind up having to stay with the stock for whatever reason. So research carefully. And rely on more than one source. You’ll find a lot of hype out there, written to pump up prices so someone else can make money off of you.
- Learn your stocks’ trading ranges. Get familiar with their charts, which you can find online, usually just by typing on the stock symbol and the word “stock” in Google search. Look at recent ranges and long term ranges to get a feel for the kind of movement you might expect. And add that to any news you can find on the company.
- Before trading any stock, watch its action over a few days. Or longer. That helps you get a feel for points where it might be good to buy or sell. And just add a little padding, so you aren’t priced out by trying o hit the very highest or lowest of the trading range.
- Stay on top if the action. If you’re going to trade to make money, check in on how your stocks are doing — including where they are in relation to your limit orders. And keep yourself up-to-date on the companies.
- Beware of using margin and shorting stocks. You can learn all that later on if you like, although I’m not a fan. Too easy to get burned. But for now, keep it simple and learn to ride the action slowly.
EXTRA RULE: Remember to factor in trading costs and taxes
when you mentally count your piles of money!
You are not always going to be a new investor
These rules for trading stocks are meant to help you get started. But luckily many of them will serve you well for the rest of your trading days. Just make sure that you stay within dollar amounts you can afford to lose or are comfortable tying up for long periods of time.
And if it ever stops being fun or takes over the bulk of your thoughts, then you may want to think about cutting back. Like gambling, this can be fun — but it can be very addicting. And it can wipe out your savings just as easily.
The stock market is still gambling no matter how smart you are.
This article is for fun and learning. Any investment can turn into a loss.
So please be careful not to invest money you can’t afford to lose.
More articles you may enjoy